Bloomberg Chief Financial Writer: The underlying logic behind US listed companies' crazy buying of cryptocurrencies

Original Title: 《Sell Your Crypto on the Stock Exchange》

Author: Matt Levine

Translated by: Odaily jk

Crypto Treasury Companies

Last Tuesday, SharpLink Gaming Inc. was still a company focused on online marketing for sports lottery, with a stock price of around $2.91 and a market value of only about $2 million. Although still listed on Nasdaq, it was on the brink of delisting. A few weeks ago, it had just undergone a reverse stock split to maintain a stock price above Nasdaq's minimum requirement of $1, and it had not met the basic requirement of at least $2.5 million in shareholder equity.

Accordingly, SharpLink announced a stock issuance that day, raising $4.5 million at $2.94 per share. The official statement was that these funds would be used to "restore compliance with Nasdaq's minimum shareholder equity requirements." However, the company also added: "We may use part of the funds to purchase cryptocurrencies in line with a treasury strategy we are considering."

But the problem is that now a bunch of "mini MicroStrategy" copycats are also being treated with crazy market premiums. The market's preference for these "new crypto treasury companies" seems endless. I completely cannot explain this phenomenon.

A month ago, I wrote a sentence: "Now the situation is like the crypto circle is constantly playing the US stock market, and the US stock market is being fooled time and again." Looking at it now, this feeling is even stronger.

Point Two: Are People Still Doing This?

This is actually not surprising: I wrote last month, "If you run a crypto investment fund and haven't acquired a US-listed company with stalled or thin business to play this arbitrage game, that would be poor management."

For all companies related to the crypto field, the current lowest capital cost is to acquire a listed company and transform it into a crypto treasury model. Therefore, we have seen players like Tether, SoftBank, Bitfinex, Nakamoto Holdings successively joining the battle. The Financial Times even reported that Trump Media & Technology Group is going to play - which is not surprising, to be honest, it would be strange if they did not join.

However, because of this, most listed companies participating in this game (except for MicroStrategy) are almost small, half-abandoned companies. Companies like Apple, which truly have real industries, cash flow, and business, of course would not get involved in this "method of causing stock prices to skyrocket through a strange operation".

For some crypto entrepreneurs, the situation might be similar. We have reason to believe that Ethereum founder Vitalik Buterin is more concerned with how to optimize the Ethereum protocol, rather than thinking about how to package ETH at a high price to sell to stock investors. But for many people, such valuation premiums are just too tempting to resist.

1. He bought a multi-million dollar long position of MNGO perpetual contracts on Mango Markets;
2. At the same time, he opened an equivalent short position, making the net position zero (flat);
3. Then, he went to the "reference exchanges" corresponding to these contracts and bought a large amount of MNGO spot;
4. Due to MNGO's low liquidity, his buy orders significantly pushed up the market price of MNGO;
5. This caused his long contract position on Mango to rapidly increase in value;
6. He then used the "book profit" from these long positions as collateral to borrow and withdraw a large amount of cryptocurrency on Mango;
7. Then, he sold MNGO on the reference exchanges, driving down the spot price;
8. This made his short contract position more valuable;
9. He again used the floating profit from this short position as collateral to borrow cryptocurrency from Mango again.

Ultimately, according to official disclosure, Eisenberg borrowed and quickly withdrew over $100 million in crypto assets from Mango Markets.

In simple terms, this was almost like Eisenberg "stealing" $100 million from Mango Markets. By manipulating the MNGO price, he artificially inflated the market value of his contract positions and then used these inflated values as collateral to borrow large amounts of funds. Since these loans were non-recourse—almost an industry standard in decentralized finance platforms—he didn't need to repay at all.

Of course, he was eventually arrested.

We have discussed this case several times before, including:

• When he just completed this transaction;
• When he subsequently posted a "Statement on Recent Events" on Twitter, explaining that he indeed did this, but it was not a problem because "all our actions were legal operations on an open market according to protocol design, although the protocol development team might not have fully anticipated the consequences of setting these parameters";
• And when he was arrested, the US federal prosecutor clearly disagreed with his explanation.

Eisenberg was ultimately found guilty by a jury last April. But last Friday, the judge overturned the conviction.

According to Bloomberg:

US District Judge Arun Subramanian last Friday revoked the conviction of Avraham Eisenberg for fraud and market manipulation, and declared him not guilty on the third charge. The judge found that the evidence provided during the trial was insufficient to support the jury's determination that Eisenberg had made false statements to Mango Markets, a decentralized financial platform driven by smart contracts.

This case exposed two key issues:

The first is the jurisdictional issue: Eisenberg was prosecuted in New York, but his so-called "game theory operation" occurred in Puerto Rico, targeting some technically "borderless" crypto trading platforms.

The three reference exchanges he used to manipulate MNGO prices were:

• FTX, headquartered in the Bahamas;
• AscendEX, headquartered in Romania;
• Serum, a decentralized exchange that might not have a headquarters at all.

And there's no evidence that Mango Markets itself has any direct connection to New York.

There has always been a consensus that "if you commit a financial crime, it's probably connected to New York," so New York federal prosecutors can almost manage the entire world. But this case shows that cryptocurrency has pushed the limits of these judicial boundaries.

In the crypto world, there's a stereotypical belief that as long as you put something on the chain, you can avoid the jurisdiction of national laws. But the reality is not that simple.

For example, in Eisenberg's case: Although he was sentenced in New York, he could theoretically be prosecuted in Puerto Rico or even Romania. However, putting things on the blockchain can indeed help you escape the judicial reach of the US Attorney's Office for the Southern District of New York (SDNY). In the crypto world, this is considered a quite sophisticated "operation".

In any case, this is the first key issue: The "commodity manipulation charges" against Eisenberg were overturned because the prosecution chose the wrong location. The US Department of Justice could consider re-filing these charges in Puerto Rico if they wish.

But besides commodity manipulation, he was also convicted of Wire Fraud—this charge was also completely revoked by the judge, and the prosecution has no right to re-prosecute.

The second core issue involves whether Eisenberg's actions constituted "fraud", which is not actually clear.

According to US Commodity Law (applicable to crypto tokens including MNGO), if you use "any manipulative means" in derivatives trading, you can be charged with commodity manipulation, which is why Eisenberg was prosecuted. But "wire fraud" is stricter, requiring the perpetrator to make false statements through computer or communication systems to obtain monetary benefits.

The court ruling pointed out:

"To determine fraud, one must prove the existence of material misrepresentation." And the judge's conclusion was that Eisenberg did not lie to anyone, no matter what he did.

The defendants - the traders of DB - would sometimes request LIBOR quotation personnel to submit quotes favorable to their positions. Court evidence shows that other DB employees and the LIBOR quotation personnel themselves admitted that "adjusting LIBOR quotes for the benefit of traders was 'not right'" at the time.

However, the court did not buy this argument. The court rejected the government's claim that these quotes implicitly meant "confirming that the quotes were not influenced by traders".

Even though market participants generally believed that trader intervention in LIBOR quotes was improper, the absence of explicit rules or guidelines prohibiting such behavior at the time was decisive. The court noted that although BBA later introduced relevant prohibitive rules (like Mango Markets updating its protocol after Eisenberg's operation), "no such rules or prohibitions existed in the early stages of this case".

We discussed the Connolly case in 2022: LIBOR itself was a "made-up" number, so DB traders were unlikely to commit a crime by "getting this number wrong". Now it can be seen that this has a similar logical analogy to the MNGO token price.

In summary, the key point here is that, at least in terms of wire fraud, the platform's terms and conditions are indeed crucial. If Mango Markets had explicitly told users: "If you want to use your position as collateral for borrowing, you must promise that you have not engaged in any market manipulation", then Eisenberg's trade would constitute fraud. But it did not say this, and said nothing at all, so his actions did not constitute fraud.

Another typical tenet in the crypto world is: "Code is law" - if a crypto system allows you to do something, you have the right to do it, even if the development team did not fully anticipate the consequences when setting parameters. Under this concept, traditional legal norms, contextual conventions, or user agreements are unimportant; only what is written in the system's code matters.

However, the ruling in this case is not entirely about this. Its actual meaning is: code can become law. If you operate a crypto platform and tell users "please do not manipulate, attack, or engage in destructive behaviors", then people might get into trouble when they actually manipulate. But if you operate a platform without saying these things, simply stating "this is how the platform works, figure it out yourself", then even if someone finds a system vulnerability and manipulates it, that is legal, or at least does not constitute wire fraud.

This actually makes sense. I wrote in an article discussing the Eisenberg operation: "You can imagine two different market systems and let users choose to join one of them": one called "Nice Market" with clear rules prohibiting manipulation and insider trading; another called "Fun Market" where anything goes as long as you can find a way to profit. I also suggested that given the crypto system's relative lack of connection to real-world financial systems (though this is changing), it might become an experimental ground for a "Fun Market", provided participation is entirely voluntary. This might be the tiny bit of "actual rules" conveyed by this case.

However, all this doesn't help Eisenberg much. As Bloomberg pointed out, when he was arrested for this crypto case, US law enforcement discovered he had downloaded 1,274 child pornography images and videos between 2017 and 2022, and he was sentenced to about four years in May this year for possessing child pornographic content.